A Tourniquet on the Knee for a Gushing Thigh
Christy comments to the post in which I express some exasperation with supporters of pension reform:
This bill is a giant step in the right direction for Rhode Island and while I appreciate some of what you have said here don’t forget that the system’s recipients are people and when these people die, the state’s debt to them is cancelled. New employees will pay into a system that is much more closely related to a private sector 401k, and tied to the market. So yeah, it will take a while to get to 80%, but this bill doesn’t pull the rug out from under current retirees (regardless of what the union bosses were saying.)
Put aside a minor adjustment for the reality of survivor benefits. My entire point, with respect to the just-passed pension reform is that the system will not make it through that long “while to get to 80%,” much less 100%, without significant additional changes, and this particular reform sets up a system that ensures that those changes will not represent additional steps in the right direction.
Let’s say, for the sake of illustration, that when time and economics have run their course, it turns out that Eileen Norcross was correct to put the actual present unfunded liability of the pension system at $18 billion. So far, with this round of legislation, we’ve addressed the problem to the extent of $3.2 billion in reforms and additionally pushed back the financial pain with re-amortization, which effectively added $1.8 billion to the amount that the state will have to pay beyond its investment returns.
So, if we look at the liability in terms of money that the state has to come up with, we’re still in need of $16.6 billion dollars. What happens when that burden again reaches crisis proportions?
Well, the newly minted law puts further reforms in the hands of an unelected board of 15 people, seven of whom are directly appointed by the union organizations that have been opposing even the meager reduction of as-yet-unearned benefits for their members. Is it likely that the Retirement Board will return for further reductions in promised pension benefits to those currently reaping the rewards of the pension system or those still paying union bosses’ salaries through their dues? Is it likely that the General Assembly will pass up the opportunity to declare that the Retirement Board has tied its hands?
Not really, and in the meantime, the hybrid plan will be taking 6% of payroll out of the equation both for defined-benefit investment returns and for use in further reforms. It may be that the $18 billion number is too high, but the value of the hybrid system decreases in direct proportion to the accuracy of the General Treasurer’s lower number. That is, if the investment return is near the Retirement Board’s predicted 7.5%, then the hybrid plan is more costly than the old plan; if the investment return is lower, the hybrid plan will offer savings (albeit only for employees who haven’t even retired yet), but we’ll have an eleven-figure liability on our hands for the system overall.
In other words, we’re looking at massive tax increases, probably eased with a regular series of reamortizations perpetually postponing the fictional day on which the system will be self-sufficient. Of course, the way the Retirement Board power grab is structured, it’ll be the better part of another decade before matters come to a head, giving everybody plenty of time to rewrite their personal history of adulation for this reform and the politicians who foisted it on us.
The comfortable narrative that everybody is telling themselves, just now, is that the very people who allowed the pension mess to reach its current point saw the light thanks to the determination of a few strong leaders… some of whom have been in office for a long, long time and all of whom are members of the union-backed Democrat machine (yes, that includes Governor Chafee). Hey, maybe that’s the case. I’m just having a hard time buying it.